Brexit: trade in goods Contents

Summary of conclusions and recommendations

UK production of goods

1.International businesses are not structured neatly along sectoral lines or national boundaries. The Government must be mindful of the complex structure of businesses, particularly multi-national companies, in its analysis of the impact of Brexit. (Paragraph 60)

2.The manufacturing and primary commodities sectors are important employers, particularly in regions outside the South East of England. Ensuring that these industries do not face additional barriers to trade with the EU and beyond will be essential to drive growth across the whole country, as envisaged in the Government’s Green Paper, Building our Industrial Strategy. (Paragraph 61)

3.Although concentrated in different regions, the production of goods and services is often intertwined. A worsening of trade conditions for goods could therefore have a negative impact on employment in supporting services industries across the country. The Government must seek a trade agreement with the EU which recognises this interlinkage, and secures the best possible terms for both. (Paragraph 62)

4.A new UK approach to immigration must take account of the needs of businesses in the UK. The ability to recruit staff from the EU-27, and move staff to and from the EU-27 through intra-group transfers, is essential to the primary commodities and manufacturing industries. The Government must ensure that its post-Brexit immigration policy allows this. (Paragraph 63)

5.We call on the Government also to clarify that the UK’s existing level of research funding and collaboration with the EU-27 will continue, or that equivalent domestic arrangements will be established, after the UK’s withdrawal from the EU. (Paragraph 64)

Trade in goods

6.The EU is, by a significant margin, the UK’s biggest trading partner in goods. Both imports from and exports to the EU are essential to the UK’s manufacturing industry and primary commodities sectors. Safeguarding UK-EU trade in goods will be a critical factor in ensuring the UK’s long-term prosperity post-Brexit. (Paragraph 77)

7.Norway and Switzerland are two of the UK’s largest trading partners outside the EU. They are highly integrated into the EU’s Single Market, and so Brexit will change the UK’s trading relationship with them. The Government should seek a comprehensive trade agreement with these countries after Brexit, to avoid a worsening of trade conditions. (Paragraph 78)

Tariff barriers

8.In the event that the UK leaves the EU without first either agreeing a comprehensive UK-EU FTA or—pending completion of such a FTA—agreeing a transitional arrangement, UK-EU trade would have to proceed according to WTO rules, and may incur significant tariff costs for UK businesses. (Paragraph 124)

9.All the sectors from which we took evidence expressed concerns about the imposition of tariffs in their sectors, although we note that the level of duties varies considerably between them. (Paragraph 125)

10.Many of these sectors are integrated into efficient EU-wide supply chains. They are both significant importers of goods from the EU and exporters to the Single Market. It is imperative that a trade deal with the EU seeks to avoid the imposition of tariffs on trade in both directions. (Paragraph 126)

11.Many UK businesses cannot easily substitute their imports from the EU with UK products. For example, the UK no longer produces three of the major feedstocks required for the chemicals industry. It may also be difficult for exporters to find new markets for goods. For example, perishable products from the UK food and beverages sector may have a short shelf-life, and customer demand for such products may not exist in non-EU markets. (Paragraph 127)

12.When establishing its own schedules at the WTO, the UK Government must give particular consideration to the implications of tariffs on the UK agricultural sector. High tariffs on imports would raise the cost to UK consumers, whereas lower tariffs could reduce the cost of food to consumers, but might undermine the domestic agricultural sector’s competitiveness. (Paragraph 128)

Non-tariff barriers

13.Non-tariff barriers can pose as significant or greater a barrier as tariffs to trade in goods. (Paragraph 178)

14.Were the UK to agree a FTA with the EU, rules of origin (which determine where a product and its components were produced) would apply. They would also apply were the UK and EU to trade under WTO rules. Applying rules of origin will generate significant additional administration, and therefore costs and delays, to UK businesses. (Paragraph 179)

15.If the UK and the EU were to agree a FTA, compliance with preferential rules of origin might be so administratively burdensome for some sectors, such as chemicals, as to outweigh the benefit of tariff reductions. It will be important for the Government fully to assess the benefit, sector by sector, of preferential rules of origin under a FTA as compared to non-preferential rules of origin under WTO terms. (Paragraph 180)

16.Some industries with an integrated EU supply chain and high levels of both imports and exports, notably the automotive sector, might be unable to comply with the local content requirements contained in the EU’s preferential rules of origin. In this scenario, WTO most favoured nation tariffs would be imposed, increasing costs and disrupting the UK’s place within the EU supply chain. (Paragraph 181)

17.Regulatory standards are a significant non-tariff barrier. If the current level of EU-UK trade is to be maintained, ongoing harmonisation or mutual recognition of regulatory standards may be required. We welcome the Government’s decision—by means of the Great Repeal Bill—to preserve existing EU regulations in domestic law as a first step towards regulatory co-operation with the EU. (Paragraph 182)

18.As we stated in our report Brexit: the options for trade, the Government will have to make a trade-off between its desire to determine UK laws and regulations, and how far-reaching a FTA it can agree with the EU (and other partners). (Paragraph 183)

19.Operating to two separate regulatory standards—for the domestic and EU markets—would be costly for UK businesses. (Paragraph 184)

20.We urge the Government to maintain close dialogue with the EU over the development of UK and EU standards post-Brexit, to avoid unnecessary divergence. (Paragraph 185)

21.But a comprehensive FTA is likely to require more than just such dialogue: it is likely to require a legal commitment by the UK to maintain a high level of harmonisation or mutual recognition of regulations and standards with the EU. This would require the UK Government to limit its exercise of regulatory sovereignty, in order to secure liberal conditions for trade. It might also require the UK to agree with the EU anew arrangement for oversight and dispute resolution. (Paragraph 186)

22.As part of this regulatory alignment, there may be significant benefits in the UK continuing to participate, where legally possible, in EU agencies. We regret the lack of information in the Government’s White Paper regarding the UK’s strong and abiding interest in continued membership of such agencies. (Paragraph 187)

23.The UK has in particular benefited from hosting and participating fully in the European Medicines Agency (EMA). The Government’s decision to rule out membership of the Single Market means that the UK may be unable to maintain its membership of this body. We regret this, and urge the Government to bring forward proposals for future collaboration with the EMA. (Paragraph 188)

24.We call on the Government to confirm whether vehicle type approvals issued by the Vehicle Certification Agency will remain valid after Brexit.
(Paragraph 189)

25.The European Aviation Safety Agency is the civil aviation industry’s ‘route to market’. We urge the Government to confirm whether the Government intends to seek continuing membership of the EASA after Brexit, and if so on what terms. (Paragraph 190)

26.The Prime Minister has stated the Government’s intention to leave the jurisdiction of the Court of Justice of the European Union. Full UK participation in EU agencies after Brexit would be likely to require some form of oversight and dispute resolution, in the specific areas covered by these agencies. We urge the Government to clarify whether it would accept such conditions for co-operation with specific EU agencies, and if so on what terms.
(Paragraph 191)

Costs of administering tariff and non-tariff barriers

27.Leaving the EU customs union would result in costly administrative requirements and customs procedures, whatever new framework for trade is established. This would result in a significant additional administrative burden for companies, and delays to consignments of goods, incurring additional costs. (Paragraph 226)

28.Administering UK-EU tariffs and non-tariff barriers—in the absence of a common regulatory system—would also significantly increase the work of HMRC, a task for which it is not currently resourced. The UK would also have to establish new customs posts, develop a new customs code and consider improvements to the UK’s systems for trade processing. We call on the Government to set out its plans for reviewing and if necessary increasing the resources available to HMRC and other agencies. (Paragraph 227)

29.We welcome the Government’s commitment to seeking simplified customs procedures for EU-UK goods trade. We note that the customs agreement proposed by the Prime Minister would be unprecedented, and we are unclear whether it will be possible outside a formal customs union (including the Common External Tariff). (Paragraph 228)

30.If a comprehensive FTA between the UK and the EU can be achieved, there may be scope within it to simplify some customs procedures.
(Paragraph 229)

31.The Authorised Economic Operator scheme provides an opportunity for registered companies to streamline certain customs procedures, and we recommend that the UK Government adopt the provisions of the current AEO scheme into UK law after Brexit. The scheme would not, however, remove the requirement for customs checks to be implemented between the UK and the EU after Brexit, and would not prevent the additional burden of associated administration and costs from arising. (Paragraph 230)

The EU and preferential trade with third countries

32.As we concluded in our report on Brexit: the options for trade, it is unlikely that the UK will be able to maintain access to the EU’s FTAs with third countries after Brexit. The UK will also not be able to conclude new FTAs with third countries until after it has left the EU. (Paragraph 259)

33.Thus Brexit is likely to result in a cessation of the preferential conditions of trade with non-EU countries currently enjoyed by UK businesses. This is likely to result in significant tariff costs and other reductions in market access for many of the sectors we considered, until new preferential arrangements can be put in place post-Brexit. (Paragraph 260)

34.We welcome the Government’s efforts to engage with non-EU countries to lay the groundwork for future FTAs. However, trade negotiations are time consuming and complex, and it is important that the Government focus its efforts where they can deliver maximum benefit. In particular, the Government should focus on countries where the EU already has FTAs in place, with a view to securing the current level of market access enjoyed by UK businesses. The terms of the EU’s existing FTAs and those under negotiation are likely to form a useful starting point for future UK agreements with these countries. (Paragraph 261)

35.The Government needs to demonstrate that it has the capacity to negotiate with the EU, and simultaneously open preliminary discussions on FTAs with third countries. We are concerned that there may be significant delays to the Secretary of State for International Trade’s plan to agree new FTAs with 15 countries shortly after leaving the EU. (Paragraph 262)

36.It is critical that the Government considers negotiating access to the EU’s preferential trade arrangements with third countries for a transitional period. (Paragraph 263)

37.The EU’s frameworks for preferential trade are a valuable tool of the EU’s foreign and development policies. When the UK leaves the EU, it is likely to lose access to such agreements, which cover a wide range of developing countries, such as the ACP and LDC groupings. We therefore welcome the Government’s commitment to continue or improve access given to developing countries under economic partnership agreements signed with the EU. (Paragraph 264)

38.We expect the Government to assess the full range of EU trade agreements, and their role in furthering the UK’s foreign and development policy objectives. We recommend that the Government consider recreating such agreements on a bilateral basis, including a UK General System of Preferences. (Paragraph 265)

Investment and business climate

39.Sterling has fallen substantially since the EU referendum. While devaluation has brought some benefits to exporters, it has also raised the cost of imports. Many UK export industries are embedded within wider EU supply chains, with a significant reliance on imports. The effect of sterling’s fall upon UK exports is thus complex and mixed. (Paragraph 286)

40.Larger companies may be able to hedge currency risk, but devaluation has a disproportionate impact upon smaller companies, which are less able to hedge. (Paragraph 287)

41.Uncertainty is the enemy of investment. Lack of clarity on what Brexit will entail has caused concern in the business community, particularly in sectors reliant on international investment. While the Prime Minister’s clarification that the UK will pursue a FTA with the EU is a start in providing greater certainty, it is critical that the Government does more to help businesses to plan for the future. (Paragraph 288)

42.The Government’s explicit support for Nissan to remain in the UK was welcome. We are not clear, however, what commitment was made by the Government, and whether any offers to the company apply more broadly to the automotive sector as a whole, or whether similar offers will be made to other sectors. (Paragraph 289)

43.International investment is critical to the UK manufacturing and primary commodities sectors. We urge the Government to engage regularly with the government of significant non-EU investors, as well as with individual businesses. (Paragraph 290)

44.The Government has limited freedom to offer guarantees to any industry: the UK-EU conditions of trade will require negotiation with the 27 EU Member States, and the UK is obliged to comply with WTO rules on MFN status, subsidies and the coverage of FTAs. (Paragraph 291)

The Government’s view

45.If the UK and EU are unable to agree a FTA within the two years provided for in Article 50 TEU, preferential terms for trade between the UK and the EU would cease, and WTO rules would apply. This can only be avoided by negotiating a transitional arrangement. Businesses, both domestic and foreign, would welcome such a period of adjustment. (Paragraph 306)

46.We urge the Government to establish at the outset of negotiations a clear strategy for a future transitional agreement, with specific proposals to what form it should take. (Paragraph 307)

47.We welcome the Prime Minister’s commitment to a phased implementation of Brexit. We note, however, that this commitment is conditional upon the UK and EU agreeing a FTA within the two years provided for in Article 50 TEU. This is inherently ambitious, and there has been no indication so far that the EU is willing to contemplate such a truncated negotiation. (Paragraph 308)

48.We are concerned that the introduction of a new IT system for customs—planned for the year that the UK leaves the EU—may add to the complexity of the trading conditions facing businesses in the wake of Brexit. We urge HMRC to ensure that the system is robust and fully tested before it is rolled out, to prevent further disruption to businesses. (Paragraph 309)

49.We welcome the Government’s commitment to report to Parliament on the cost of new infrastructure and of additional staffing at customs posts. (Paragraph 310)

50.We welcome the Government’s efforts to increase the promotion of UK trade overseas. We ask the Government to confirm that it is confident it has sufficient commercial staff in UK embassies overseas to promote the UK’s trade interests, in particular in comparison to the staffing of the embassies of other European countries. (Paragraph 311)

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